Make next year’s tax season easier
The April 15 filing deadline has come and gone, but tax planning is hardly forgotten.
Rather, this a good time to ponder changes that could shave your income tax. The numbers are still fresh, the documents are handy and there’s still eightplus months left in the year to get the job done.
Some of the most generous tax-sheltering opportunities involve retirement plans.
Workers with earnings usually can opt for a choice of programs, including 401(k)-style plans and Individual Retirement Accounts, of either the traditional or Roth varieties. What these accounts have in common is their ability to allow investment earnings to grow taxsheltered until the money is withdrawn.
With traditional IRAs and 401(k) accounts, investors also may deduct their contributions. With Roth IRAs and Roth 401(k) plans (offered as a workplace benefit by some employers), there’s no deduction but the money comes out tax-free, subject to certain restrictions.
Think retirement
There’s a tendency to think about retirement planning around tax time, as IRA contributions are one of the few taxs-having moves you can make as late as April 15 and still apply them to your prior year’s return. But it’s best to invest much earlier than that, giving your dollars more time to compound.
Think charities
It also is natural to delay thinking about charitable contributions until the waning weeks of the calendar year when a large number of donations are made. But there are good reasons to spread your giving throughout the year.
For one thing, you will have more time to research which nonprofit groups you want to support. Websites such as CharityNavigator.org and GuideStar.org provide a lot of basic information for free. The IRS also has a charity-organization search link at IRS.gov.
Besides, it can be easier on your budget to spread donations throughout the year, rather than write a bunch of checks in November or December, when your finances might be strained by holiday shopping.
Charity donations, like many other expenses, can be deducted on federal returns only by people who itemize. Yet tax reform increased the standard deduction, thereby reducing the number of taxpayers who would gain from itemizing.
Think bunching
Still, taxpayers near the standard/ itemizing break-even point might consider doubling up on their deductible expenses in one year, then skipping them the next. This bunching strategy works well with discretionary, optional expenditures such as charity donations, but not so well for expenses that come on a mostly fixed schedule.
Medical expenses also can be bunched, as some treatments or procedures can be moved up or delayed to the following year. Yet most taxpayers don’t incur enough unreimbursed medical costs to itemize them – these expenses were deductible in 2018 only to the extent they exceeded 7.5% of a taxpayer’s adjusted gross income.
For 2019 and beyond, the threshold rises to 10%, making medical costs even harder to deduct.
Think organization
Now that you have all your tax-related receipts and statements handy, make an effort to file them in a way that makes sense for you, then keep the process going as more paperwork comes in.
To keep track of deductible receipts, a simple filing system is all you need, said David Du Val, an enrolled agent and chief customer advocacy officer at TaxAudit.com, an audit-defense firm.
He also recommends scanning receipts as you go, to avoid the possibility they might fade, and he suggests placing them in files labeled by type of deduction.
No matter what you decide, the key is to set up a system that you’ll be willing to use on a regular basis. When new statements or receipts arrive, put them in the appropriate file. Organize your files either on paper or digitally, depending on what works for you.
Think clutter
Now that you have your tax returns and other paperwork within reach, it’s time to decide what to keep.
The general rule is to retain tax returns and supporting documents for at least three years, though certain items should be kept longer. These include statements showing how much you paid for your home or investments, especially if you haven’t sold them yet. It also might pay to retain mortgage-interest statements, property-tax receipts and charity receipts if you itemize.
If you’re pretty sure you will take the standard deduction, there’s no need to retain a lot of this paperwork. This underscores the tax-reform goal of making tax-return filing and related paperwork easier.
The IRS offers more suggestions for how long to retain records at irs.gov.
Think refunds
Refund amounts dropped a bit this filing season, to an average $2,800 or so through early April, yet nearly four in five taxpayers still got money back. Refunds are a sizable amount of cash for a lot of people, often enough to make a large dent in paying down debt, boosting savings or making a big-ticket purchase.
That’s why most people like to get refunds, without recognizing that refunds also represent interest-free loans to Uncle Sam. In other words, if you got a refund, you missed out on using the money during the year. You can see where you stand by checking the IRS’ withholding calculator at irs.gov.
You might need to make estimated quarterly payments if your withholdings aren’t doing the job alone. This is especially true for people taking parttime or gig jobs. “Gig workers must report their income and pay taxes on it,” noted an article in the CPA Journal. “This includes both income tax and selfemployment tax to cover Social Security and Medicare taxes.”
People who previously had taxes withheld as employees might be unfamiliar with this new responsibility, the article added.
Think investments
If you hold stocks, mutual funds or other securities outside of IRAs or 401(k) plans, consider the timing of your trades. Unsheltered short-term gains are taxed at ordinary-income rates, while long-term gains (those held more than a year) qualify for lower capitalgains rates. For most people, those rates would be 0% or 15%.
Investment losses first are applied to offset or reduce any gains. But if your losses exceed your gains, you may deduct up to $3,000 in excess losses each year against ordinary income, and unused amounts can be carried forward to future years.
Investment-timing decisions typically come into play as a late-year tax strategy, but it’s wise to consider the impact throughout the year.